In looking for a topic for today’s post, I saw two articles both by respected journalists in respected publications bemoaning the fact that many individual investors seem to have missed out on the current rally in the stock market.
During the third quarter the S&P 500 Index rose 6.4%; the index is up 16.4% for the year; and it is up 113% since the market of March 9, 2009. Yet market volume is down and investors continue to sell off holdings in equity mutual funds and ETFs. This year alone these funds and ETFs have seen net outflows of $100 billion with net outflows of about $500 billion since the market bottom of 2009.
While I think there is something to these and other news accounts along these lines, I’m not sure this is all that relevant to most investors. I know in the case of the clients for whom I provide advice, full participation in a rally is not really important. What is important is that they don’t fully participate on the downside.
I do agree with the issues raised in the two articles and elsewhere about net inflows into bond funds. In many cases I suspect this is a flight to safety, however given the ultra low interest rates many of these unsuspecting bond fund investors could be in for a nasty surprise when rates finally head up.
To me, the issue is not whether investors are fully participating in the current rally. The bigger issue, and the one that investors should really concern themselves with, is whether their portfolio reflects a proper balance of risk control with enough equity exposure to meet their longer-term goals. That will look very different across a broad spectrum of investors.
Focus on Your Asset Allocation
Younger investors should be heavily exposed to equities. They have the luxury of time on their side and should not be concerned with short-term losses. However, several studies have shown that many younger investors have been scarred by the recent downturn and are doing just the opposite.
Investors closer to or in retirement generally still need a healthy allocation to equities as part of a well-balanced portfolio. This might be anywhere from 40% to 60%, more or less depending upon their income needs, the level of assets accumulated, their risk tolerance, and a host of other factors. To say these folks have missed the rally misses the point.
An investor with a 50% allocation to equities has seen that portion of their portfolio participate in the rally. The rest of their portfolio has likely lagged but that is by design. A properly designed portfolio will have components that perform well during differing market conditions.
Take the Financial News Media with a Grain of Salt
This is along the lines of the headlines that we have seen about the “Lost Decade” for investors. Yes investors who held an S&P 500 Index fund or other investments that closely tracked that index had miserable returns from 2000-2009. However, those with a more diversified portfolio that included small and mid caps, international holdings, and fixed income for example did reasonably well over this time frame.
As always, be a critical consumer of the financial news media. Make sure to read beyond the headlines and the hype and ask yourself does this apply to me and my situation?
Please feel free to contact me with your investing and financial planning questions.
Photo credit: Wikipedia